Is Weakness In Freeport-McMoRan Inc. (NYSE:FCX) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

Freeport-McMoRan (NYSE:FCX) has had a rough three months with its share price down 11%. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Freeport-McMoRan's [1] ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital. See our latest analysis for Freeport-McMoRan [2]

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) / Shareholders' Equity So, based on the above formula, the ROE for Freeport-McMoRan is:

15% = US£4.4b / US£29b (Based on the trailing twelve months to June 2024). The 'return' is the yearly profit.

So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.15.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Freeport-McMoRan's Earnings Growth And 15% ROE

At first glance, Freeport-McMoRan seems to have a decent ROE.

Especially when compared to the industry average of 9.8% the company's ROE looks pretty impressive. This certainly adds some context to Freeport-McMoRan's exceptional 27% net income growth seen over the past five years. We reckon that there could also be other factors at play here.

Such as - high earnings retention or an efficient management in place. Next, on comparing Freeport-McMoRan's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 24% over the last few years.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in.

Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Freeport-McMoRan is trading on a high P/E or a low P/E[3], relative to its industry.

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Is Freeport-McMoRan Efficiently Re-investing Its Profits?

Freeport-McMoRan has a really low three-year median payout ratio of 25%, meaning that it has the remaining 75% left over to reinvest into its business. So it looks like Freeport-McMoRan is reinvesting profits heavily to grow its business, which shows in its earnings growth. Additionally, Freeport-McMoRan has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 24% of its profits over the next three years. Accordingly, forecasts suggest that Freeport-McMoRan's future ROE will be 16% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Freeport-McMoRan's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return.

This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.[4]

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.[5] This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation.

Simply Wall St has no position in any stocks mentioned.

References

1. ^ Freeport-McMoRan's (au.finance.yahoo.com)
2. ^ See our latest analysis for Freeport-McMoRan (simplywall.st)
3. ^ check if Freeport-McMoRan is trading on a high P/E or a low P/E (simplywall.st)
4. ^ visualization of analyst forecasts for the company. (simplywall.st)
5. ^ Get in touch (investor-research.typeform.com)